Market Performance

Global share markets sold off in August as volatility increased. Uncertainty around the likely timing of the first increase in official interest rates by the US central bank and further economic data out of China suggested growth in economic activity is moderating. China’s equity market continued to dominate headlines and fell -12.5%, however still remains up +44.6% year on year. In the US, the Dow Jones and S&P500 fell -6.6% and -6.3% respectively, while in Australia the S&P/ASX 200 Accumulation Index fell -7.8%. Defensive sectors including utilities, A-REITs and consumer staples outperformed while information technology, energy and financials suffered the heaviest falls.

Commodities were mixed during August. Iron ore prices rose +5.2%, spot gold rose +3.6% and crude prices were up +2.6%. However base metals were weaker with the LME Index down -2.5% and coal prices weakened with coking and thermal down -3.2% and -2.5% respectively. The Australian dollar fell for a second consecutive month and closed August at US$0.71, its lowest monthly close since March 2009.

Data on the US economy showed the recovery continues. The unemployment rate was steady at 5.3% as the US economy added a healthy number of jobs and the Institute for Supply Management said its services sector index jumped to 60.3, the highest reading in this economic cycle.

Recent data out of China suggests overall activity growth likely slowed again in July after seeing some improvement in June. The official purchasing managers’ index (PMI) in China flattened to 50, indicating no growth in manufacturing. The alternate private sector reading indicated a contraction in manufacturing activity with the PMI falling to 47.8, the worst reading since March 2009. Growth rates in industrial production, fixed asset investment and retail sales all moderated in July, while indicators for the services sector expanded. Against this backdrop the central bank devalued the Yuan and described it as part of a new way of managing the exchange rate to reflect market forces, but the timing also suggests it was aimed at helping exporters. In an effort to stimulate, the central bank cut the one year lending rate for the fifth consecutive time in the current easing cycle.

In Australia, inflation remains well contained and low interest rates continue to support the housing sector and the fall in the Australian dollar also contributed to business confidence remaining positive. Business conditions continue to vary across industries with the services sector outperforming the mining, wholesale and manufacturing sectors.

The majority of listed companies reported their financial year 2015 results in August with general market themes including growth in dividends exceeding growth in earnings and the mining sector and companies exposed to mining supply chains confirming they remain under pressure. Highlights from the profit reporting season included; Bluescope Steel (BSL) announced a result and guidance for the year above consensus expectations, both driven by cost reduction initiatives. Treasury Wines (TWE) was a standout after reporting a stronger than expected result and flagging potential for capital management and significant margin accretion over time. Earnings results and outlook commentary from WorleyParsons (WOR), Downer EDI (DOW) and Qube Logistics (QUB) highlighted that challenging market conditions continue in the mining services sector.

Attribution Analysis for the month ended August 2015

Top 5

Bottom 5

Sims Metal Management

Boral

Challenger

M2 Group

Echo Entertainment

CSR

Bluescope Steel

Flexigroup

SAI Global

ResMed Inc

Fund Performance

In August the Concise Mid Cap Fund returned -4.28%, +0.7% above the benchmark return of -4.95%. Best performers for the month were Sims Metal Management (SGM), Challenger Ltd (CGF) and Echo Entertainment Group (EGP). Detractors from performance were Boral (BLD), M2 Group (MTU) and CSR Limited (CSR).

News on portfolio stocks included;

Sims Metals (SGM) share price jumped +21% in August after reporting a +42% increase in operating cash flow and highlighting that if FY15 volumes were flat on FY13 volumes it would have already achieved its FY18 earnings target. Overall, the outlook for SGM continues to improve with the company in a position to deliver higher earnings on the back of successful implementation of the strategic outcomes. Valuation metrics remain attractive, SGM has a net cash balance sheet and the company generates solid free cash flow. SGM is progressing through its five year strategic plan and the latest result increases our confidence that successful execution may result in a more than doubling of earnings.

Challenger (CGF) reported normalised profit of $334m and cash operating earnings in the Life business of $544m, at the top end of the stated guidance range. Annuity net book growth was +9.4%, slightly ahead of guidance (+9%) and the result from funds management was also positive with earnings up +12% on 1H15. CGF is exposed to several dynamics which underpin our long term investment thesis and should continue to create value by driving both demand and tenor of annuity products. The annuity book continues to be exposed to tailwinds including an ageing population, increasing life expectancy, an under allocation of private client portfolios to defensive assets and a growing awareness of longevity risk.

Outlook

The August reporting season reinforced our previous commentary that companies are operating in a low growth environment where strong revenue growth is difficult to achieve. We expect this environment to continue to prevail over the coming twelve months. While the lower Australian dollar is boosting business confidence offsetting this to a degree is the benign environment for income growth. We expect inflation to remain contained and believe the RBA will continue its easing bias for the official cash rate.

Despite limited revenue growth, the outlook for earnings growth remains reasonable as opportunities to improve the efficiency of operations and additional cost reductions will deliver margin benefit. Corporate balance sheets remain strong and provide optionality for companies generating free cash to invest in their business or look for growth from mergers and acquisitions.

Share price growth over the last few years has largely been driven by the expansion of multiples investors are prepared to pay for a company’s earnings profile. Over the coming twelve months, earnings growth and investors rewarding this growth will be the driver of outperformance. Company management and the strategy being adopted will become increasingly important as investors focus more on underlying earnings drivers and less on macro economic news.

*The Mid Cap Masters Index is a price and accumulation price, free float adjusted index calculated daily for Concise on behalf of S&P. The constituent universe of index is the S&P/ASX 200 excluding the S&P/ASX 50. * The CMCF commended on the 16th of April 2008. The since inception figure is annulaised.

This publication is intended to provide general information only and has been prepared by Concise Asset Management (ABN 62 126 975 282) and (AFS Licence No. 320497), the issuer of the Fund, without taking into account any particular person’s objectives, financial situation or needs. Investors should before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. Your investment is subject to investment risk, including possible delays in repayment and loss of income and capital invested. The repayment of capital or income is not guaranteed by Concise Asset Management. Offers of interests in the Fund are contained in a current Product Disclosure Statement (‘PDS’). A copy of the PDS is available from our website: www.conciseam.com.au or contact Client Services on (03) 9642 8968. You should read the PDS and seek professional advice before making any decision about whether to acquire or continue to hold an investment in the Fund.